Even though the banks can lend out 14 times their capital, I have always been a little confused as to where they get the 14 times money from to lend out or invest. 1.) The can get it from deposits. 2.) CD's. 3.) Borrow from a wholesaler on a daily basis. 4.) Borrow from another country (the Japanese carry trade). 5.) Borrow from the FED (a new development that might be temporary). The problem is if they are borrowing on a daily basis and rolling over each day, but lending for longer periods of time, they can get caught in a squeeze of higher short term interest rates while lending at a fixed rate for a longer period of time or not being able to borrow or roll over on a daily basis. Is this correct?
fed fund rate only benefits commercial banking immediately, retail banking still have great deal of difficulty to lend and spiking loan lost. From last quarter earning, GS and JPM were doing well, but BAC and C were still losing money. You can see the disconnection within banking sectors, therefore the picture is not rosy as economists have painted. Inflation pressure for commercial banking,(bond and equity market are inflated), depression for regular working class(wages and working hours are shrinking). In other word, bond and equity are more liquidated, easier to get out than retail banking. As a result, currency devaluation is way to go, then hike interest rate to elevate with it.
Yes. One of the things that happened, at at least one bank, was that suddenly it wound up with a disproportionate amount of its funding coming from very short-term paper. When the money markets froze up, it became tough to roll that paper over.
Yes, its correct in the sense that 1-5 are legit sources of *base* capital. Its from those sources (and others), Banks originate (create) loans in accordance with their capital requirement. For example, Bank A borrows 5 Million from JPM for a 30-day term. Bank A then deposits that 5 Million with the Fed and now can create loans up to 71 Million dollars with a 7% capital req. Yes, the borrow-short lend-long play is where geared banks got caught from illiquid ST credit.
"The US dollar shortage in global banking and the international policy response" http://www.bis.org/publ/work291.pdf?noframes=1
The only real 'liquidity' present in US markets is market based liquidity. Corporate/junk bond issuance, IPOs, etc. This is hardly a strong bull point however, because its like saying 'the market should go up because the market is up', this type of liquidity is a state of mind and can come and go at the blink of an eye Period periodically change their moods, if the only lending in town goes away the financial system is back at its creditless phase again